Bernstein: America is turning Japanese

I do believe the U.S. policy response to this financial crisis is very much like the Japanese response to their crisis in the 1990s. I have a post up at “naked capitalism” making this point. I would add, however, that America is in a worse position due to its lack of exports and manufacturing and it huge current account deficit and low savings.

A critical assumption behind the latest plan being proposed is that there is no market for bank assets. This is clearly untrue,” the US-based Mr Bernstein told clients in a note.

“There is a market, but the bid/ask spreads are exceptionally wide. Distressed sellers (that is, banks) do not like the bids they are receiving for their tarnished assets. In addition, these distressed sellers do not want to sell good assets (who would?).”

Rather than forcing bad banks to sell assets at distressed prices or seizing the assets (as was done in the 1989/91 cycle), Mr Bernstein said the latest plan tried to put the government in the middle of the yawning gap of the bid/ask spread.

“Private investors can effectively pay a reduced price because of generous government financing, yet banks can receive fictitious inflated prices for their assets – everyone should be happy,” he said.

“The problem, however, is that the plan sacrifices the longer-term health of the economy and the financial system for a short-term fix for the banks. Excess lending capacity will remain, lending will accordingly be curtailed, and bank profitability pressured.”

Mr Bernstein argues that the current attempts at reviving the US economy appear to be a version of the Japanese policy during the 1980s and 1990s as that country battled to snap its slump. These policies mostly centered on keeping the excess capacity alive and hope the economy can grow into it.

“Financial history solidly suggests that such policies will not work,” Mr Bernstein said.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.